LEVEL 2 GLOSSARY
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Balance Sheet
This financial statement tells you if the company is in the black (good) or red (bad). The statement details the good, the bad, and the ugly of the company's liabilities, assets and shareholders??? equity. One rule to remember here is a company's assets = liabilities + shareholders' equity.
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Book value
Theoretically, it’s what a shareholder would receive if the company were liquidated or sold for cash today. As we all know, the books don't always reflect the reality.
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Income Statement
One of the three common financial statements that is basically the company's quarterly budget. This is how much the company made and how much it spent, the bottom line (literally) being the profits left over.
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Market maker
A brokerage firm that is willing to sell you a stock (at the bid price) or buy one back from you (the ask price). They play both sides and make money off of each. Brilliant!
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Security
Basically, any contract representing ownership, such as stocks, bonds, options, swaps, notes, and futures. It says, "I OWN THIS"
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Shares Outstanding
The total number of shares currently held by investors.
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Statement of Cash Flows
Do you balance your check book? So do companies, and this is what it looks like. This is one of the three common financial statements compiled by a company. It shows how the company generated cash and where it spent it.
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Value Investing
An investment strategy that relies on picking stocks that are undervalued by the market and hoping that the market catches up at some point.
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Annual report
This report airs the company's dirty laundry with the freshest spin possible. They tell you what happened last year and what the financials look like all in one place, they can usually be found filed with the SEC or on the company website. Companies are required by law to put these out, but don't get fooled by the pretty pictures???the bad stuff is in there too.
See full glossary
In Level 2, we'll take you a little deeper into the trading world. Like in Level 1, there are a series of concepts that you should master before taking the Level 2 quiz. Remember to click the "Mastered this concept?" link at the bottom of the page to keep track of your progress in your Report Card.
- Invest in what you know
- Working at the stock market
- Price of stock
- What affects share price?
- Judging a stock
- The Fair-Price Rating
- Shares outstanding
- Where to learn about a company
- Growth investing
- Value investing
- Invest like Buffett
- The government's role
- LEVEL 2 QUIZ
What affects share price?
What we'll learn:
1) Why stock prices go up and down
2) Why stocks can be rational or irrational
3) Why quality is so crucial
Here's a bulletin from the Department of Obvious: Stock prices go up and down every day. What that means to you is, you can't get too caught up in the market's ups and downs.
In a quote attributed to Warren Buffett, he describes the stock market as a voting machine in the short term and a weighing machine in the long term.
So in the near term, the machine just makes a whole lot of noise. Most of the time, you shouldn't really pay attention to stock prices.
Over time, though, the price of a stock does get established. So you want to keep your eye on the stock for a much longer period of time.
But what determines whether a stock goes up or down? Well, let's look at the trusty company Apple (AAPL) back in 2003. Everyone knew the company, but there wasn't much buzz around it.
Its stock was at around $7. Then Apple came out with the iPod and then the iPhone. Bam! Share price eventually rose to a whopping $200 a share.
The lesson here: If a company comes out with something everyone wants, that affects the demand side of the famous supply/demand equation.
In this case, a company (Apple) released new products (iPod and iPhone) that everyone just had to have. Come on, admit it: You have one of those products. Your friends probably do, too.
If it's a good product, people tell their friends, and they come back and use it again themselves. And when enough people buy a product, it starts to show up in the numbers. That helps investors gauge how healthy a company is.
Good products and great sales beget great company reports. But since earnings reports are only done quarterly, most investors wait for the reports and then buy or sell the shares of the company.
Good investors watch what consumers buy, and then jump in during that lag time before the reports are released.
To use the Apple example again, let's say the company was at $5, and it went to $120. Great if you got in on the bottom, but alas — you didn't. Eventually, the stock went back down to $40.
Question: How can you know how much higher it's going to go? Answer: You can't. That's the thing — no one knows. But you just have to trust your instincts and try to be smart about it.
So to get a jump on Wall Street, just look around and see what others are buying. Over time, one thing is certain: Good companies produce good products. And if those companies are run well and their products are bought and enjoyed by consumers, their stock prices will go up.
So keep an eye out for great companies with great products and you're bound to find a winner or two.
Three Facts to Wow Your Friends at a Party
1) In the 1930s, AT&T (T) was considered a "widow-and-orphan" stock, because the company paid a dividend (income that was needed by the "widows to feed the orphans").
2) In 2008, an old news article about United Airlines’ (UAUA) bankruptcy accidentally reappeared on Google (GOOG) and sparked a $1 billion run on the airline’s stock value in a single day.
3) In the movie Wall Street, Bud (Charlie Sheen) deflates the stock price of Bluestar Airlines so Gordon Gekko (Michael Douglas) will sell all of his shares and Bud can scoop them up.
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